SPWH - What The May Retail Report Indicated About The Consumer

2023-06-16 17:11:20 ET

Summary

• The Commerce Department's monthly retail report for May showed that consumers increased their spending by a seasonally adjusted 0.3%. This beat expectations of a 0.1% decline.
• The spending was broad-based across categories and came at the same time of declining prices at the pump.
• Important categories, such as apparel, still lag. This is viewed to be attributable to a combination of the pricing environment and the overall spending priority of consumers.
• Forward indicators suggest consumers are likely to continue spending in the periods ahead. Though positive, it may not be to the liking of the Federal Reserve.

May’s retail report showed that Americans keep spending, despite fears to the contrary.

And why shouldn’t they? Job openings are abundant, there is little fear of job loss, and gas prices are declining. Sure, headwinds exist, namely inflation and interest rates. Rising debt burdens and the impending restart of student loan payments also create emerging risks. But the consumer, nonetheless, remains undeterred.

What Categories Of Retail Spending Are Increasing?

On Thursday, the Commerce Department reported that retail sales rose a seasonally adjusted 0.3% from April to May. Consensus estimates were for a 0.1% decline.

The gains were broad-based and came as spending at gas stations fell 2.6% from a month earlier. The declines at the pump are notable, considering they typically rise heading into the summer travel season.

The additional dollars in wallets enabled consumers to spend on categories, such as building materials and garden equipment, which were up 2.2%. In Q1, Home Depot ( HD ) and Lowe’s ( LOW ) both reported a slow start to the season due to poor weather. The positive data here could bode well for the two on their Q2 release.

Spending was also up on furniture and home furnishings following declines in prior months. Big Lots ( BIG ) could be one to watch in the periods ahead. The company suffered following their Q1 release due in part to poor sales of seasonal and bigger ticket items. With consumers still opting for discounts when they can get them, I wouldn’t be surprised to see some of the increased spending on the month to have been directed their way.

Sporting goods and other hobby materials were also up 0.3% on the month following a flat April. Again, this could have come on the back of improved weather prospects. Outdoor-based retailers, such as DICK'S Sporting Goods ( DKS ), Big 5 Sporting Goods ( BGFV ), and Sportsman’s Warehouse ( SPWH ) could have been some beneficiaries.

The benefit, however, is likely to have flowed to DKS, given stronger demand trends noted in their most recent release . On the flip side, the eventual restart in student loan repayments could provide an offset since their target customer base skews younger .

Spending at grocery stores increased 0.2%. The increased spending here is likely due to the higher prices at restaurants. The food away from home index reported in May’s CPI report showed that prices were up 0.5% in May. This compares to an increase of just 0.1% in groceries. And YOY, consumers are paying 2.5% more to eat at a restaurant than at home.

But that doesn’t appear to be stopping consumers from an occasional indulgence. While the retail report is mostly goods-based, it does capture spending on food services and drinking places. Here, spending was up an even greater 0.4% on the month. Moreover, spending in the category is now up 8% YOY. Spending in grocery stores, meanwhile, is up a lesser 3.1%.

One standout category was clothing and accessories. Sales here were flat for the month following a 0.1% increase in April. They are also down 0.2% YOY. One reason for this is that overall prices are still increasing faster than many can likely tolerate.

Overall apparel prices were up 0.3% in May, with a 0.7% increase in the Women’s category. This continued a streak of consecutive increases, and it comes despite talks of an increased promotional environment from many retailers.

Foot Locker ( FL ) was one such company that alluded to a more aggressive approach to discounts in the periods ahead. On the most recent CPI report, there are some signs that this is beginning to be reflected in prices, as the category was flat for the month. But this evidently hasn’t flowed into the retail report. Perhaps consumers are waiting it out for better pricing. In the meantime, they’re continuing to reallocate their earned dollars to where it matters.

Why Is Retail Spending Increasing?

The better-than-expected spending is in the wake of positive data surrounding consumer expectations.

In May, for example, data from the New York Fed showed that among those surveyed, just under 11% expected to lose their job in the next twelve months. This is down from 12.2% in April and about flat from last year. In addition, it’s well below the average of approximately 15% prior to the pandemic.

The data also is stacked against the mean probability of one leaving their job voluntarily, which continues to hover around 20%.

The abundance of job openings and record low unemployment rates is providing most of those surveyed with the confidence that their existing jobs are secure.

And it’s increasing their spending expectations, accordingly. More notable is that the higher expectations are coming from those on the lower end of the income spectrum. Those making less than $50K, for example, expect to increase their spending by 4.6% over the next year. This compares to 4.5% and 4% from those making $50K-$100K and over $100K, respectively.

While some would attribute the higher expectations to the inflated environment, it should be noted that 1-year inflation expectations are lower now than they were in 2022. The higher expectations, therefore, from lower income consumers may be one bullish indicator, as these consumers generally tend to drive overall spending levels.

What Is The Current State Of Household Debt?

Rising debt levels and resulting delinquencies do create downside risk. According to the New York Fed, average household debt balances increased +$2.9T since the end of 2019, just before the pandemic. In addition, the share of debt newly transitioning into delinquency increased for most types in Q1.

For credit cards and auto loans, for example, early delinquency increased by 0.6% and 0.2%, respectively. Though delinquencies on student loans have remained flat, this is expected to tick higher upon their restart. Furthermore, over 100K consumers had a bankruptcy notation added to their credit reports in the first quarter of 2023. This was the first time that it crossed 100K since the second quarter of 2021.

What Is The Overall Health Of Retail Spending?

Though credit metrics are moving in the wrong direction, I believe consumers remain on solid footing. Overall delinquency rates are still lower than pre-pandemic levels. And U.S. households continue to sit on high levels of cash and cash equivalents.

A recent survey conducted by CNBC and Morning Consult showed that over 90% of Americans are pulling back on spending. Yet May’s retail report indicates the opposite. While some categories are capturing a greater share than others, the general trend appears positive.

Looking ahead, I expect retail volume to increase from a more promotional environment, especially in apparel. Upcoming holidays, including Juneteenth and Independence Day, should also provide an additional boost. With Independence Day falling on a Tuesday, this could temper the spending effect.

Though the rate cycle continues unabated, the American consumer remains largely unfazed. This, unfortunately, may not be the right music for the Federal Reserve.

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